It’s a Whole New Ballgame under TRA 2010! Really?

Charlie Douglas, JD, CFP®, AEP®, Editor
Email: editor@naepcjournal.org
Phone: 404.279.7890

When “The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” (“TRA 2010”) was signed into law by President Obama on December 17, 2010, it shook up the estate planning world and created a two-year window by which we could finally begin advising our clients with a modest amount of planning clarity regarding profoundly changed wealth transfer rules.

Short on sound tax policy that allows clients and advisers to adopt wealth transfer plans with a longer-term tax horizon, TRA 2010 nevertheless, creates significant wealth transfer planning and counseling opportunities for helping clients leave an intended legacy.

For at least the next two years, estate planners will need to know how best to advise their clients regarding the planning possibilities and potential pitfalls found within TRA 2010. Should an executor pay estate taxes or opt-out for a modified carry-over basis regarding a decedent who died in 2010? How should a tax-planning trust currently be written to avoid unintended consequences within the family unit? Are trusts, particularly bypass trusts, still warranted given portability and the ability to use a deceased spouse’s unused exclusion amount? And finally, what gifting techniques ( properly executed) provide the most leverage and best exploit the newfound $5 million gift tax exemption?

With the highest wealth transfer tax exemptions and the lowest transfer tax rates in modern times, TRA 2010 presents tremendous opportunities for the truly affluent ($10 million plus) to implement significant wealth transfer plans until December 31, 2012. Given a $5 million unified estate, gift, and generation skipping tax exemption (indexed for inflation), a 35% combined estate, gift and GST tax rate, all-time low federal interest rates, relatively low asset values, and no legislation at this time restricting the use of GRATs and/or valuation discounts on family controlled enterprises, the conditions for transferring vast amounts of wealth are extraordinarily compelling.

During the next two years, large gifts to Dynasty and Spousal Access trusts will likely become much more prevalent. Similarly, gifts and sales to Grantor Trusts should rise in their use with easier seeding due to the increased gift tax exemption and their ability to generation skip. Furthermore, gift-splitting between spouses ought to increasingly come into play as should business succession planning that was unavoidably delayed during the past few years of economic turmoil.

For more modest estates with several million or more, the issues surrounding prudent planning are particularly challenging and give rise to a bevy of questions. Will clients even see the need for estate planning in the new world of portability? Will the simplicity and flexibility of disclaimer trusts result in their becoming the estate planner’s planning vehicle of choice and will clients’ actually make sizable disclaimers to them? And will generic tax-planning formulas found within many estate planning documents be reviewed and revised in view of the significant differences found in funding a bypass trust or martial trust with $5 million (2011-2012) or $1 million in 2013?

If nothing else, TRA 2010 serves as a poignant reminder that estate planning should always have been more than simply passing on property in a tax-efficient manner. With portability and the possibility of passing on $10 million free of estate taxes between a husband and wife for at least the next two years, more than 99% of the estates should remain untaxed. As such, estate planners must step-up their game in counseling clients on the non-tax aspects of how best to plan their client’s estates.

At this time, practitioners will need to retool themselves regarding the non-tax reasons for trusts and helping clients to prepare their heirs to receive and manage the assets they inherit. And that’s good news, because estate planning at its core is the continuing effort to help clients leave an intended legacy, where property is passed on in a manner that protects and empowers the family unit and the next generation.

What the future will hold for estate planning practitioners during these changing times, no one can say for sure. Be that as it may, while TRA 2010 most assuredly was a game-changer regarding the rules of the planning game, the ballgame itself remains relatively unchanged.

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Charlie Douglas, JD, CFP®, AEP® has practiced in the business, tax, estate and financial planning areas for over 25 years. He holds a J.D. from Case Western Reserve School of Law and possesses the Certified Financial Planner® and an Accredited Estate Planner® designation. As a senior vice president for a leading global wealth management institution, Charlie specializes in comprehensive planning solutions and trust fiduciary services for business owners, high net-worth individuals and their families. Charlie is a board member of the National Association of Estate Planners & Councils (“NAEPC”) and is the current editor of the NAEPC Journal of Estate & Tax Planning.

This information is provided for discussion purposes only and is not to be construed as providing legal, tax, investment or financial planning advice. Please consult all appropriate advisors prior to undertaking any of the strategies outlined in this article, many of which may involve complex legal, tax, investment and financial issues. This communication is not a Covered Opinion as defined by Circular 230 and is limited to the Federal tax issues addressed herein. Additional issues may exist that affect the Federal tax treatment of the transaction. The communication was not intended or written to be used, and cannot be used, or relied on, by the taxpayer, to avoid Federal tax penalties.